Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are +40bps with no major data on the tape for today.

Resistance: 6,150, 6,164, 6,200

Support: 6,120, 6,100

1 week ago we discussed the idea that ~1-month upside SPX calls were at IV lows (i.e. “cheap”). A benign CPI on 2/12 has since triggered a 125 bps rally in the SPX to fresh all time highs this AM. We were/are of the view that there could be one more “blow off top” type move at hand before we see options values reflecting risky positioning (more on this below).

Under the IV hood, we can see evidence that vol is a bit bid after that CPI reading, with IV’s generally 1/2 vol point higher than pre-CPI (stock up/vol up is good for calls!).

This higher IV could be a bit of a weekend effect lifting short dated vols, but today also aligns with tomorrow’s VIX expiration. While it is not a particularly large expiration, it may be offering a tail wind for equities today. We read dealers as short VIX puts down to the 15 strike which is what we see as the VIX low into tomorrow.

Further, we see some positive gamma padding in SPX from 6,100 to 6,150, supporting our long thesis. Should the SPX break <6,100, we would flip back to risk-off.

The equity tailwind today is because today is the last day traders can trade VIX 2/19 expiration options, which expire tomorrow at 9:30AM ET.

Some on social medias try to make the argument that this VIX expiration through Friday OPEX should open a window of weakness. We have a slight issue with this due to: 1) these are small expirations & 2) NVDA ER on 2/26.

While there is a bit of IV lift for the early March expiration posted above, SPX term structure is showing a very low risk environment. Consider next weeks ATM vols (pre-NVDA ER), which are now <10% which is as low as it gets for the S&P500. SPX IV’s show a little bump on 2/26 due to NVDA earnings. We suspect this IV is reflecting some macro event-vol tied to this all-important stock (and sector).

You can get a since of this lower IV bound via VOLI, which measures the 1-month ATM SPY vol. The blue dash line is marked at post-Covid lows, which we now sit upon. From this point IV’s have really only gone lower 1 time: early Dec 2024.

The other metric we are watching closely is COR1M: SPX correlation. The blue line marked below is 2017 lows, which were breached in July ’24, and again in Feb ’25. Both triggered strong selling in equities.

When this metric is at these lows it suggests single stock vols have decoupled from index vol in a major way. Some of this is due to earnings events (like NVDA), but the earnings effect is occurring into a macro environment/theme of single stock chasing. In this case, we have names like META/PLTR ripping, while GOOGL/MSFT etc languish.

We can make the argument that if NVDA earnings are good, it will supply a final equity vol & correlation drop (a “final vol squeeze”), ushering in a blow off equity top. At the same time, these metrics are low enough to justify owning 3-6 month downside protection, as bad things usually happen from these vol levels. The rub is it make take a bit of time for the volatility pop a la July ’24 which we argue triggered August ’24 (VIX +60).